INCOME TAXES

This note provides details about our income taxes applicable to continuing operations:


•	earnings (loss) before income taxes,


•	provision for income taxes,


•	effective income tax rate,


•	deferred tax assets and liabilities and


•	unrecognized tax benefits.

Income taxes related to discontinued operations are discussed in Note 3: Discontinued Operations.

EARNINGS (LOSS) BEFORE INCOME TAXES

Domestic and Foreign Earnings (Loss) From Continuing Operations Before Income Taxes



DOLLAR AMOUNTS IN MILLIONS
	2011			2010			2009
Domestic earnings (loss)	$	341		$	96		$	(605	)
Foreign loss	(84		)	(14		)	(169		)
Total	$	257		$	82		$	(774	)

PROVISION FOR INCOME TAXES

Provision (Benefit) for Income Taxes From Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2011			2010			2009
Federal:
Current	$	(73	)	$	53		$	(333	)
Deferred	11			(1,180		)	140
	(62		)	(1,127		)	(193		)
State:
Current	16			3			(1		)
Deferred	(11		)	(69		)	(22		)
	5			(66		)	(23		)
Foreign:
Current	8			9			12
Deferred	(13		)	(8		)	(45		)
	(5		)	1			(33		)
Total income tax benefit	$	(62	)	$	(1,192	)	$	(249	)

EFFECTIVE INCOME TAX RATE

Effective Income Tax Rate Applicable to Continuing Operations



DOLLAR AMOUNTS IN MILLIONS
	2011			2010			2009
U.S. federal statutory income tax	$	90		$	29		$	(271	)
State income taxes, net of federal tax benefit	4			4			(24		)
REIT income not subject to federal income tax	(80		)	(37		)	—
Foreign taxes	20			4			23
Federal income tax credits	(4		)	(4		)	(6		)
Medicare Part D subsidy	—			26			2
Provision for unrecognized tax benefits	(7		)	(3		)	18
REIT conversion benefit	—			(1,064		)	—
Cellulosic biofuel producer credit	—			(149		)	—
Repatriation of Canadian earnings	(76		)	—			—
Other, net	(9		)	2			9
Total income tax benefit	$	(62	)	$	(1,192	)	$	(249	)
Effective income tax rate	(23.3		)%	N/M*			32.1		%
* Not meaningful

One-Time Tax Benefits/Charges

In 2011, we recorded a tax benefit related to foreign tax credits associated with the repatriation of Canadian earnings.

As a result of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act and a change in our postretirement medical plan, it was determined that previously recognized deferred tax assets related to the income tax deduction for prescription drug benefits provided to retirees and reimbursed under the Medicare Part D subsidy would not be realized and a $32 million charge was recorded in 2010.

In 2010, we reversed certain deferred income tax liabilities, primarily relating to temporary differences of timber assets, as a result of our conversion to a REIT. See Note 1: Summary of Significant Accounting Policies.

There were no one-time deferred tax benefits or charges during 2009.

Fuel Credits

During 2009, the U.S. Internal Revenue Code allowed a $0.50 per gallon tax credit for the alternative fuel component of alternative fuel mixtures produced and used as a fuel in a taxpayer’s trade or business. In 2009, we had 688 million gallons of qualifying alternative fuel mixture, resulting in $344 million of credits. The alternative fuel mixture credit expired on December 31, 2009.

In 2010, the IRS concluded that black liquor sold or used in 2009 qualifies for the cellulosic biofuel producer credit. Black liquor potentially qualifies for either the cellulosic biofuel producer credit or the alternative fuel mixture credit (but not both on the same gallon of black liquor). During 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel producer credit at $1.01 per gallon, or $149 million net of tax, which we recognized in fourth quarter 2010.

DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities reflect temporary differences between pretax book income and taxable income. Deferred tax assets represent tax benefits that have already been recorded for book purposes but will be recorded for tax purposes in the future. Deferred tax liabilities represent income that has been recorded for book purposes but will be reported as taxable income in the future.

Deferred Income Tax Assets (Liabilities) Related to Continuing Operations by Category



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2011			DECEMBER 31, 2010
Forest Products:
Current	$	81		$	113
Noncurrent	(93		)	(366		)
Real Estate	240			266
Net deferred tax assets (liabilities)	$	228		$	13

Items Included in Our Deferred Income Tax Assets (Liabilities)



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2011			DECEMBER 31, 2010
Postretirement benefits	$	134		$	172
Pension	337			109
Real estate impairments	141			205
State tax credits	57			57
Net operating loss carryforwards	169			162
Cellulosic biofuel producers credit	238			240
Other	371			390
Gross deferred tax assets	1,447			1,335
Valuation allowance	(146		)	(142		)
Net deferred tax assets	1,301			1,193
Property, plant and equipment	(610		)	(668		)
Timber installment notes	(277		)	(277		)
Other	(186		)	(235		)
Deferred tax liabilities	(1,073		)	(1,180		)
Net deferred tax assets (liabilities)	$	228		$	13

OTHER INFORMATION ABOUT OUR DEFERRED INCOME TAX ASSETS (LIABILITIES)

Other information about our deferred income tax assets (liabilities) include:


•	net operating loss carryforwards,


•	valuation allowances and


•	reinvestment of undistributed earnings.

Net Operating Loss Carryforwards

Our state and foreign net operating loss carryforwards as of the end of 2011 are as follows:


•	$815 million, which expire from 2012 through 2031; and


•	$133 million, which do not expire.

Valuation Allowances

With the exception of the valuation allowance discussed below, we believe it is more likely than not that we will have sufficient future taxable income to realize our deferred tax assets.

Our valuation allowance on our deferred tax assets was $146 million as of the end of 2011. This primarily related to foreign and state net operating losses and state and provincial credits.

The total changes in our valuation allowance over the last year was a net increase of $4 million. This net increase resulted primarily from:


•	$7 million increase due to additional foreign losses and


•	$3 million decrease due to the change in expectations of future use of state net operating loss carryforwards.

Reinvestment of Undistributed Earnings

In 2011, we made the decision to dividend earnings from a foreign subsidiary which allows us to recognize a tax benefit of $76 million related to foreign tax credits associated with the repatriation of Canadian earnings. The balance of our foreign undistributed earnings was approximately $22 million at the end of 2011 and has been permanently reinvested; therefore, it is not subject to U.S. income tax. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on the remaining undistributed earnings.

HOW WE ACCOUNT FOR INCOME TAXES

The Income Taxes section of Note 1: Summary of Significant Accounting Policies provides details about how we account for our income taxes.

UNRECOGNIZED TAX BENEFITS

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. The total amount of unrecognized tax benefits as of December 31, 2011 and 2010, are $251 million and $180 million, respectively, which does not include related interest of $33 million and $30 million, respectively. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as the federal deduction that could be realized if an unrecognized state deduction was not sustained.

Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits



DOLLAR AMOUNTS IN MILLIONS
	DECEMBER 31, 2011			DECEMBER 31, 2010
Balance at beginning of year	$	180		$	170
Additions based on tax positions related to current year	1			1
Additions for tax positions of prior years	91			17
Reductions for tax positions of prior years	(11		)	(6		)
Foreign currency translation	(2		)	4
Settlements	(2		)	—
Lapse of statute	(6		)	(6		)
Balance at end of year	$	251		$	180

The net liability recorded in our Consolidated Balance Sheet related to unrecognized tax benefits was $24 million as of December 31, 2011, and $48 million as of December 31, 2010, which includes interest of $33 million and $27 million respectively, net of payments made in advance of settlements.

The net liability recorded for tax positions across all jurisdictions that, if sustained, would affect our effective tax rate was $140 million as of December 31, 2011, and $98 million as of December 31, 2010, which includes interest of $33 million and $27 million, respectively.

In accordance with our accounting policy, we accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense.

As of December 31, 2011, our 2008 - 2010 federal income tax audit has not yet begun. We are undergoing examination in various state and foreign jurisdictions for the 2005 - 2010 tax years. We expect that the outcome of any examination will not have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

In the next 12 months, we estimate a decrease of up to $4 million in unrecognized tax benefits on several individually insignificant tax positions due to the lapse of applicable statutes of limitation in multiple jurisdictions.